Being mortgage free is the paradise that all mortgage holders are looking for, and thousands of people every year decide to over pay on their mortgage to help them achieve this goal. Whether this overpayment is a lump sum, or one or two extra payments over the course of a year, reducing your mortgage will help you to save later on in life.

However, does the notion of paying off your mortgage early distract you from putting money away in a savings account? At the end of the day, what is a better position to be in – mortgage free with no savings, or savings and a hefty mortgage? Let’s take a look at the pros and cons of paying or your mortgage, or saving the money instead.

Savings

Before you make a decision about whether or not to save or spend, first consider whether you have enough of a savings fund to build on. In order to cover any emergencies, it’s always recommended that you have at least four to six months’ worth of savings in the bank. Even if you do have a decent amount of money to fall back on, that still doesn’t mean that you should spend it on paying off your mortgage, or clearing a decent chunk of it at least.

Before using this money to pay off your mortgage, consider paying off any other debts you have, like credit cards or other financing debts. These expenditures will typically have higher rates of interest, meaning you’ll be saving yourself money in the long run if you pay these amounts off. Only then should you consider paying off your mortgage with your savings. There could be early-repayment penalties if you decide to clear some of your mortgage, so always seek the advice of your m

Making Sense Of It All

In order to choose saving your money over paying off your mortgage, your savings account would have to offer better interest rates compared to the money you would save reducing your mortgage debt in the long run. If we take a look at the best mortgage deals verses the current interest rates across the typical high street savings accounts, saving your money wouldn’t be advisable.

As interest rates are very low at the moment, you’ll certainly be paying more interest on your mortgage repayments compared to the money you would save with your savings account. Getting an ISA savings account is key if you want to avoid income tax on savings interest, but again, what you are able to save in a savings account must also be compared to what you would knock off your mortgage in the long run.

If you are able to make monthly overpayments on your mortgage, then you could find that you’re making quite a saving on your debt. Over a typical 25 year mortgage, a homeowner could save over £8,000 just by making an extra £50 payment every month, based on a £150,000 mortgage. Furthermore, the more you can pay off on top of your monthly repayments, the more you’ll save!